This report explores, at a practical and non-technical level, the various ways in which climate change risk may affect insurers across the sector, and how regulators expect board members to challenge and oversee their firms’ identification and management of climate change risks. We provide example board-level challenge questions in each of these areas, and examples of positive and negative indicators that we think supervisors are likely to look for as they assess whether an insurer is responding adequately to the risks of climate change.

Financial services regulators worldwide are moving quickly to ensure that banks, insurers and asset managers identify risk exposures from climate change and establish strategies and adjust business models to manage them. Insurers hold a unique position in the climate change debate because, unlike any other sector, climate change risk affects both the asset and liability sides of the insurance balance sheet. Moreover, insurers have amassed decades’ worth of expertise in extreme risk pooling and management. Insurers are, therefore, simultaneously both more exposed to financial risks from climate change than many other financial institutions, and uniquely positioned to manage and mitigate the catastrophic effects that climate change could have on the economy and society.

The report covers the following key areas, that we expect to be the areas of greatest current focus for regulators:

• Risk identification and risk appetite – how insurers identify and set risk appetite for climate change risk and deal with key areas of uncertainty.
• Strategy and business model – how insurers’ strategies and business models are affected by climate change, including products, pricing, and the extent to which insurers contribute meaningfully to the climate change debate and response.
• Capital modelling and stress testing – how insurers develop their climate-related modelling and stress testing, taking into account the non-linear nature of climate change.
• Asset transition risk – the challenges insurers need to overcome in order to transition to “greener” investment portfolios with sufficient portfolio yields.
• Governance and culture – the extent to which insurers demonstrate a board-led culture that encourages serious consideration of climate change issues across the organisation.
• Conduct – how insurers take into account the effects of transition risk on consumers, and anticipate supervisory action on “green-washing”.

Climate change and the role of the insurance industry is a critical priority for financial services regulators globally. Building supervisory confidence in how they are stepping up to this challenge is therefore a pressing need for insurance boards. Our new report is intended to help insurers step up to this leadership role in a manner that meets regulatory expectations.

About the Centre for Regulatory Strategy, EMEA

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation.

With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.